Supporting borrowers with loan agreement transition.

Following the large-scale LIBOR fixing scandal exposed in 2011, and a general decline in the importance of interbank lending within the financial markets, the Financial Conduct Authority (FCA) has indicated that it wants to move the financial markets away from using LIBOR as a benchmark. The FCA favours risk free rates (RFRs) which are based on actual transaction data and less susceptible to manipulation.

There are differences between RFRs and LIBOR which are significant, especially for the loan market. As a result, in comparison to other markets such as the derivative markets, there has not yet been many transactions referencing RFRs in the loan market.

The fundamental difference is that existing RFRs are based on historical transaction data and so, unlike LIBOR, there is no element of ‘forward looking’ to the expected movements in interest rate market over the interest period built into the rate. The practical and commercial effect of this is that where interest rate payments are referenced to RFRs, such as SONIA, borrowers can expect loans to be offered on terms where the borrower has less notice as to the interest payments that will be due. The reason for this is that RFRs will likely be calculated at or shortly before the date when payment is due, rather than at the beginning of the interest period, as is usual for LIBOR loans. Therefore, it will no longer be clear well in advance what will be payable. Consequently, some market participants have delayed transition plans awaiting the development of a forward looking RFR term rate.

What does this mean for borrowers with new loans?

Borrowers should make sure they understand the financial and practical implications of the interest payment mechanisms and benchmarks proposed.

What does this mean for borrowers with existing loans?

We can advise you on the implications for your contracts which reference LIBOR. We are able to review your contracts to assess the effect that the discontinuance of LIBOR will have on the agreement and to enable you to consider whether the terms are still commercially acceptable or require renegotiation.

For borrowers with extensive financing arrangements we can offer a tailored service to assist with the process of assessing and managing LIBOR transition, working with you to make sure the extent of the risk/exposure for the business is understood in good time and mitigated as effectively and efficiently as possible.

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LIBOR transition update: Synthetic rates for Sterling and Yen

The FCA has confirmed that synthetic rates will be published for 1, 3 and 6 month Sterling and Yen LIBOR from the 1st of January 2022, for at least 12 months.

These rates will be available for use in all legacy contracts, except cleared derivatives, because clearing houses already plan to transition their instruments to risk-free rates by the end of this year.

Find out more

Keep up to date with the latest on LIBOR

Our team regularly produces articles, updates and tools to support clients through the LIBOR transition. Click below to read the latest content from Collyer Bristow.

Read latest LIBOR information
A Collyer Bristow White Paper  for the Real Estate sector

A Collyer Bristow White Paper  for the Real Estate sector

Getting to grips with LIBOR transition and loans

Collyer Bristow surveyed real estate businesses on the steps they are taking to prepare for the end of LIBOR and the introduction of new benchmark reference rates.

Read our latest White Paper for the findings of our research; the differences between LIBOR and risk free rates; the impact on borrowers with new loans; the impact on borrowers with existing loans.; and how Collyer Bristow can help.

Download White Paper

Real Estate sector: Are you prepared to move away from LIBOR?

In March 2020, Collyer Bristow (facilitated by Estates Gazette) surveyed Real Estate businesses on the steps they are taking to prepare for the end of LIBOR and the introduction of new benchmark reference rates.

Download survey results infographic

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